Exam 17: Payout Policy

Salvage deserves special consideration in financial lease analysis, just as it does in any capital budgeting situation.Explain how this is true, both in terms of salvage estimates, and in the treatment of salvage and UCC tax shields.

In the event of a lessor's bankruptcy, the lessor's legal position with the leased asset is this.

A financial lease has the following characteristics: Asset cost: $10,000; tax rate: 30%; CCA rate: 20%; after-tax cost of capital: 15%, lease term: 4 years, with $2,500 annual lease payments and tax shields in advance, and salvage and UCC tax shields in Year 4.Salvage is zero.The asset is part of a large pool.What important timing considerations should an analyst watch for in this analysis? What is its present value?

Lease analysis reveals that salvage value of an owned asset has a significant effect on the incremental analysis of a lease.

In financial lease analysis, there is a comparison between:

If a financial lease analysis uses a higher discount rate than a lessee would ordinarily use on conventional secured loan, which one of the following reasons would best explain that dichotomy?

An operating lease is a longer term arrangement than a financial lease.

All but one of the following are reasons for leasing:

Lease analysis is affected by assumptions about the asset pool in which the leased asset is kept.Explain how the results of such analysis would be different if the asset was alone or if many assets in it pool at the end of a lease contract.Consider the situation where the tax rate is 40%, CCA = 30% and the discount rate were 10%, and the difference between UCC and salvage were $10,000.

Short-term leases are convenient but: